Investments

Capital sums for investing are acquired in many ways. These include inheritance, maturing savings policies, windfalls and proceeds from many years of saving. Investment types & requirements can be divided into short and long term needs.

Short term investment needs

These include saving for a car or a holiday. The most suitable investment type is usually a deposit account such as a bank or building society account.

Long term investment needs

These can be saving for retirement, school fees or providing capital for children as they grow up. You may wish to consider savings other than bank deposit accounts for longer term needs.

Whatever the investment type, you'll need to consider a number of important factors including ease of access to funds, charges and any tax implications,

Investment Trusts are companies that buy and sell shares in other companies.

When you invest in an investment trust company, you become a shareholder of that company. Your shares will rise and fall in value according to supply and demand for the shares.

Investment trusts enable you to spread risk by investing in numerous other companies - without the hassle of having to buy, monitor and sell shares individually.

Investment Trusts and Shares

You can have shares in as many different trusts as you like.

The investor is taxed as for any other share - Dividends are received with a tax credit of 10%. Non-taxpayers cannot reclaim this tax. Lower rate and basic rate tax payers have no further liability. Higher rate taxpayers are liable to a further 22.5% on the grossed up dividend.

Charges include a bid/offer spread of around 5% for buying and selling shares and a management charge of between 0.3% and 0.5% per annum. The overall charges of an investment trust are generally cheaper than a unit trust.

These are intended as a medium to long term investment.

You are not certain to make a profit, you may lose money / make a loss.

A unit trust reduces your risk of investing in the stock market by pooling your savings with thousands of others, and then spreading the money across a wide range of shares or other types of investment.

Unit trusts are also cost effective, charging a fraction of what it would cost you to invest in a broad basket of shares by yourself. The beauty of unit trusts is that professional fund managers are employed to look after your money.

Unit Trust Performance

So what is a unit trust and what are the risks?

By diversifying your investment, a unit trust will spread the risk automatically. You could therefore benefit from stock market returns without limiting your investment to a small number of companies.

Whatever your objective, income now, income later, a growing income or building up a large investment, a suitable unit trust can be found. There are many unit trust plans available, and we can find a unit trust to meet your risk profile. Please contact us for further information

Unit Trusts & Income Tax

Income from unit trusts is liable to income tax and capital gains are potentially liable to capital gains tax if personal allowances and reliefs are exceeded.

An endowment policy is a savings and life assurance policy for an agreed period, the minimum term being 10 years. A tax free benefit is normally paid out at maturity or on earlier death.

The policyholder may sell the policy in the traded endowment market, as an alternative to surrender before the end of the term, although this must be carefully considered as financial penalties will often apply.

There are charges on all endowment policies and the Key Features document from endowment providers will explain these.

Endowment policy types

If you withdraw from this type of investment in the early years you may not get back the amount invested.

With profits endowment policy

With profits endowment policies are normally enhanced with regular bonus payments. Bonuses are added to the sum assured and once added can be withdrawn at certain times. Please follow links below for more information.

Bonuses may be added annually (known as the reversionary bonus) and at the end of the term (a terminal bonus) depending on investment performance.

Low cost endowment

Low cost endowment policies were invented by insurance companies to reduce the cost of the with profits policy, and provide a means of paying back an 'interest only mortgage.'

It is a combination of a with profits endowment policy and decreasing term assurance (to ensure the capital sum borrowed is repaid in the event of death).

Bonuses are added to the endowment sum assured with the intention that there should be sufficient cover to repay ,say, a mortgage at the end of the period. Low cost endowment policies are not guaranteed and maturity levels depend on investment performance.

Low start endowment

Low start endowment policies were Introduced to help young 'first time house buyers'. Low start endowments are another type of with profits policy where bonuses are added to the endowment sum assured. The level of cover is the same as the low cost endowment, but premiums start at a lower level and then increase at a set percentage for five years. The eventual premium is higher than the level premium under a low cost endowment policy.

Unit linked endowment policies

Premiums buy units in a fund of the investor's choice. Units will be cancelled each month to buy life cover. There is investment flexibility as funds can be switched.

Units will be purchased at the offer price and sold at the bid price (usually lower) incurring a bid offer spread charge of around 5%. Set up costs will be taken off the fund value.

Flexi endowment

A policy is written say for a total term, say to the age of 65, with options to encash after 10 years without penalty. The policies are usually written in segments to allow some to be encashed and some to be continued. This may be suitable for school fees planning.

Friendly society plans

An investment bond is in fact a whole of life policy usually paid for with a lump sum or single premium.

Proceeds can be taxable if the investor is a higher rate taxpayer and may also be taxable for lower rate taxpayers.

The money invested is used to buy units in a selected fund. Most insurance companies offer a wide range of funds from low to high risk.

Investment Bond Special features

5% of the original investment can be withdrawn each year for 20 years (until entire capital is returned), deferring taxation until final encashment. The main Advantages of an investment bond are given below.

a packaged investment for growth;

can take income by cashing in units;

simple to operate;

wide range of geographical funds available.

Types of investment bond include With profits, distribution, guaranteed growth and unit linked.

These are intended as a medium to long term investment. If you withdraw from this investment in the early years you may not get back the amount invested.

With profits bonds

With profits bonds tend to be very popular with the more conservative investors as returns are smoothed. The underlying investment funds usually consist of a balanced portfolio of UK investments, overseas equities, fixed interest stock, cash deposits and sometimes property.

Annual bonuses are usually added to the policy, but there is no guarantee of the bonus rate from year to year. This depends on the performance of the underlying investments within the bond and the level of smoothing adopted by the life company.

Part of the with profits fund growth is held on reserve - the balance is declared as a bonus. Using reserves allows a 'smoothing out' of performance.

The with profit bonus rate may not look very competitive in years of good stock market returns, however the reverse is generally true when stock market returns are poorer. There is also a bonus payable on maturity known as the terminal bonus although this is not guaranteed.

Distribution bonds

These provide income and the underlying investment fund tends to be invested in income producing assets. This type of fund is useful for the investor taking withdrawals from a bond, as interest or dividend is taken rather than original capital.

Guaranteed income and growth bonds - Income bonds offer a regular, annual or monthly payment at a guaranteed rate for a fixed term. At the end of the term the original investment is returned.

The guaranteed growth bond, as its name implies, offers guaranteed growth on capital at the end of a fixed term say five years. These types of bonds should not be used if you are at all likely to cash in early.

Surrender values are often not available and if they are given they will result in a lower yield than the guaranteed rate. Some guaranteed growth and income bonds are written as single premium endowment policies.

Stock market bonds

These products allow exposure to the stockmarket, and generally offer the greater of the return of the capital invested or the performance in the FT-SE or other stockmarket index over a given time period.

This is intended as medium to long term investment. If you withdraw from this investment in the early years you may not get back the amount invested.

The guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.

Jonathan Hales

Independant Financial Advisor

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